Taxing perks

Vikas Agarwal, TNNOct 20, 2006, 12.20pm IST

DELHI: The fringe benefit tax (FBT) is the taxation of perquisites (fringe benefits) provided by an employer to his employees. Any benefits (perks) that employees get in addition to the cash salary or wages qualifies for FBT. It is taxed in the hands of the employer.

The logic of taxing FBT on the employer lies in the difficulty of collecting and accessing the FBT on employees ' end. Other thoughts are to check inventive accounting practices of companies and to restrict certain employees getting unintended benefits.

An employer can be an individual , Hindu undivided family engaged in a business or profession, a company, a firm, a local authority, a sole trader etc. The FBT is payable by the employer even where he is not liable to pay income tax. FBT is also applicable to foreign companies who have employees based in India.

FBT is already in practice in many developed nations like USA, UK, Canada, Australia, New Zealand, Japan etc. The FBT rules in India are modeled on the Australian system.

It is applicable if the employer has incurred any expenses related to an employee's entertainment, gifts to employees, use of club facilities by employees, employee welfare , sports, conveyance, tour and travel (including foreign travel expenses), hotel lodging, repair, running and maintenance of motor cars, use of telephone and so on.

The employer pays FBT at 30 percent with respect to the value of fringe benefits provided to his employees. Fringe benefit value calculation depends on the type of benefit. Based on the type of fringe benefit, the finance ministry has fixed a certain percentage that will be used to calculate the value of benefit (taxable amount) for FBT.

For example 20 percent of telephone expenses come under FBT. The idea is that if a company provides telephone connection to an employee , 80 percent of usage will be done for business and 20 percent will be for the personal benefit of the employee. It is this 20 percent benefit which is liable to be taxed under the FBT.

Therefore, FBT in this case comes out to be six percent (30 percent of 20 percent) of the total amount paid under telephone expenditure. Latest list of fringe benefits with applicable percentages can be taken from the income tax offices or income tax website. Further, companies can avoid paying fringe benefit tax if their auditors certify an expense as genuine business expenditure.

In the 2006 budget, the Finance Minister revised some FBT clauses:• Fringe benefit value for 'tour and travel' and hospitality was reduced from 20 to five percent• Employer can contribute to employees' superannuation fund up to Rs 1 lakh per annum• Expenses related to free samples of medicines distributed to doctors and expenses related to brand ambassador and celebrity endorsement are excluded from FBT